Sustainability is considered as one of the most important objective of urban planning. However, due to inappropriate planning, weak institutions, lack of resources and poor implementation of policies most of the big cities in the developing nations have become less sustainable: environmentally, economically and socially than they were in the past. The challenge of informal settlements is widely recognized in international and national programs on sustainable development. Informal settlements are an urban phenomenon. They are often characterized as ‘illegal’ residential formation lacking basic infrastructure, security of tenure, adequate housing, etc. Poverty and social exclusion are key drivers behind the formation of illegal settlements. Thus, this research work aims in discussing the economic, social and environmental aspects of slums and recommending strategies to upgrade slum areas for making Kathmandu valley environmentally sustainable.